Brexit clock ticking fast for Irish firms to get VAT-ready

If a week is a long time in politics, then a year is an absolute eternity in the politics of Brexit.

 

Last year, we outlined the VAT implications of Britain’s looming departure from the EU. Already complicated, the picture has since become even cloudier as the UK’s Internal Market Bill pushes for a new law that would change post-Brexit customs and trade rules in Northern Ireland. Things are far from resolved, and one Brexit issue which could impact businesses in Ireland is VAT. For the many Irish firms that rely on the UK/NI markets for goods; VAT will be extremely complex with significant challenges in terms of cashflow, administrative burden, and overall competitiveness.

“The first thing to say is that the proposal to change the Northern Ireland VAT regime under the Ireland / NI Protocol to the Withdrawal Agreement will probably make it the most complicated in Europe,” says Cróna Clohisey, Public Policy Lead with Chartered Accountants Ireland.

“Under the Protocol, Northern Ireland will follow most EU VAT rules in relation to goods but this is not the case with services,” she says. “There are potential headaches in store for Irish companies exporting to, and especially importing from, the UK, and you must start getting on top of the rules now.

Come the first of January 2021, the UK will effectively operate three different VAT regimes. These include VAT rules for goods in Northern Ireland, which will continue to reflect the current position under EU law. For the rest of the UK (Britain excluding Northern Ireland), there will be a different VAT regime for goods. And finally, the UK will have a separate set of VAT rules for services.

No postponement on VAT payments

“If you’re an Irish firm trading with Britain, that’s where the biggest change is going to happen as you’re now going to be dealing in imports and exports rather than intra-community supplies,” says Cróna Clohisey. “For many businesses, this will be the first time they’ve had to deal with the rules for imports and exports.”

“The main issue will be for Irish companies importing goods from Britain,” she says. “From next year, you will be responsible for the import VAT and that will have to be paid immediately on import, whereas pre-Brexit any VAT arising could be dealt with later in your tax return.”

“If you’re adding 21% to goods worth €100,000, that’s an additional €21,000 you have to come up with that you may not have had to come up with before,” Clohisey adds to illustrate the point. “You will be able to claim it back later, but you could be waiting as long as 10 weeks before you’re able to recoup it in your next VAT return if you don’t have a deferred payment arrangement with Revenue.

“Although the UK Government has announced that it will postpone import VAT regardless of the Brexit outcome, the Irish Government has said it will only postpone import VAT on goods traded with Britain in the event of a no-deal Brexit,” she says.

“Irish importers will be able to account for the VAT later, as they currently do on goods from the UK.  If an agreement is reached between the EU and UK, VAT on imports from Britain could cause significant cashflow issues,” Clohisey says. “This is probably one of the biggest challenges that Irish firms will have to deal with in terms of importing goods from Britain, particularly those who don’t have a deferred payment account with Revenue.”

Registering for UK VAT

Another unforeseen issue coming down the tracks is the potential need to register for VAT in the UK. Up to now, many businesses were happily trading within the EU, so Irish firms did not necessarily need to register for VAT in the UK – that is about to change. “Situations will arise in 2021 where you will need to register for UK VAT, or where it will be more appropriate to do so,” says Cróna Clohisey.

“The problem with VAT registration is that it can take a long time,” she says. “Remember, you’re dealing with a new trading regime and HMRC (UK tax authority) won’t just hand out these registrations to anyone, they need to check it’s a legitimate business and that can take weeks.

“If you wait until January [to register], it could be March or April before you get your VAT registration,” Clohisey warns. “I’d be doing it now, don’t wait.”

While the ‘carving-out’ of Northern Ireland continues to make political headlines, it’s clear that there are customs and VAT-related ripples that will have a profound effect on Irish companies dealing with the UK.

Act now

“Now is the time to prepare,” says Cróna Clohisey. “Many Irish firms, especially the smaller guys, will need assistance and advice to understand the new UK/NI trading regime and how it affects them. There are some good supports out there including revenue.ie or, as a first port of call, you should talk to your accountant or financial controller.”

Revive Active: Preparation is key for post-Brexit success

Preparation is everything when it comes to Brexit, with the consensus being that you really can’t start early enough to prepare for the changes that will come in 2021. One company that knows everything about preparation is Revive Active, a massive success story in the Irish health supplements sector that is determined not to let Brexit slow down their plans of expansion in the UK.

 

Revive Active has been successful almost from its formation in 2011, thanks in large part to research and its dedication to producing exceptional products. The company was founded by Daithí O’Connor, who comes from a finance background but put over 12 months’ research into the supplements sector before establishing the company. “It was almost by accident that I was introduced to supplementation,” he explains. “There were a number of medics in Galway who were interested in alternative medicine and I was introduced from the business side. While they had an array of different ingredients that they would recommend to individuals, nobody had taken on the task of putting these ingredients into one product.

Daithí could see the effects of key ingredients such as CoQ10 and L-Arginine, both of which were involved in Nobel prize-winning studies, and so came up with the idea of putting these ingredients in with many other vital ingredients for wellbeing. “The idea was to make the best product possible, and then figure out the rest afterwards. That has always been the main thrust of our business, to always raise the bar. Our first product, Revive Active, is our flagship product, and contains 26 ingredients in a dissolvable sachet that is easily absorbed. We have 13g of product in there with no fillers or binders – to take Revive Active in tablet form would mean taking thirteen individual tablets.

And undoubtedly, the business has been a success: From 2016 to 2018, turnover doubled, and from 2018 to 2020, it doubled again.

Brexit strategy 1: Move to Ireland 

Today, the company has nine products, with one more in development, seven of which are manufactured by the company inhouse. At first manufacturing was outsourced to the UK, but with Brexit looming, Daithí made the decision to move the operations inhouse to Ireland. “I always wanted to come back to Ireland and manufacture here but we were curtailed by finances. But with Brexit coming I discussed it with our head of operations Colm Horton, , we thought we would bite the bullet and set it up. It has been a fantastic success, and we now have 14 people employed in Mullingar. We’ve been in operation about 18 months and already it’s getting too small and we’re looking at additional warehousing for storage.”

The move was made to minimise the financial risks from Brexit; in 2018, the company was granted European Regional Development Funding (EDRF) for the employment of a manufacturing manager at the plant. EDRF grants are implemented and managed by Enterprise Ireland.

Brexit strategy 2: Put your customers first  

From the very start, Revive Active’s greatest marketing tool was its customers. Our biggest issue was trying to explain to the consumer why our product was different,” Daithí says. “You’re curtailed by claims – even the two ingredients with Nobel Prizes behind them don’t have claims with the European Food & Safety Authority. So, our customers were our biggest advocates and salespeople because they experienced the products benefits. Different people got different results, eg sleeping better, more energy, clearer thought, fewer colds and flus, and they then would tell their friends. Word of mouth is still so important for us.”

Daithí could clearly see that keeping the customer happy was key to success in post-Brexit Britain. “Our customers don’t care about Brexit. If they order a product, they expect to get it the following day. We must maintain our top class service to our  customers as anything less would be a threat to our business.”

“We thought at one stage we could supply everything for the UK from Mullingar, and perhaps incorporate the tariffs and customs. But then we began to think that we could not risk our product being stuck in customs. So first we have built up stock, which we will send over before the end of the year to give us a two-month buffer. Then we are contracting out manufacturing to a company in Wales to supply the UK. It means we have two separate entities supplying the UK and Europe.”

Daithí says that supply to Northern Ireland could come from either location, and it’s important decisions like these that Enterprise Ireland’s advisal services have been invaluable. “Enterprise Ireland has been a great support to us with making such decisions over the past few years. In fact, I have been in touch with a specialist logistics person to discuss Northern Ireland post-Brexit.”

Brexit strategy 3: Look at the market trends

Daithí says that the UK represents about 10-15% of their business, but he sees significant room there for growth. The company has retail partners in Ireland, the UK, Nigeria and Portugal, but online is an important market, and through this, they sell all over the world. And it is here that Daithí sees the opportunities for growth in the UK post-Brexit and in wake of Covid-19.

“The whole industry has changed with Covid; the city centres are not getting the business they had before, but online is way up. Community pharmacies are also probably seeing an uplift. Luckily, we had a presence both in the city centre and through community pharmacies already.”

The company can also see the advantages of being a health and wellbeing business at a time when health is everything to the consumer. Both the online business and this focus on health and fitness have had an impact on Revive Active’s marketing plans in the UK. “We’re supplying Sheffield United football club for the 2021 season with Zest – we’re the official immune-support partner for the club,” says Daithí. “We also have a number of ambassadors such as Irish international and Sheffield United player John Egan and professional rugby player James Ryan. We’ll also launch a PR and digital marketing campaign to really push the business next year.”

Making sure your customs declaration form is accurate

Irish companies moving goods to, from and through the UK will be required to complete customs declaration forms and pay duties on the goods.

 

Carol Lynch, partner at BDO Customs & International Trade Services

Registering for customs is the easy first step; then you need to decide how to pay the duties and apply for the Deferred Payment scheme if needed. A vital additional step is to decide who will be completing the customs declaration form. According to Revenue, the biggest single reason that goods are stopped at border crossings is due to data errors – so it’s imperative that the person filling out the forms is experienced and well trained.

“It’s a very difficult process,” explains Carol Lynch, partner at BDO Customs & International Trade Services. “There are two essential streams of information that you are including on the form – the first is in relation to customs and tax and the second is in relation to the freight and movement of goods. For the latter, you should be able to provide that information by working with your haulier and referring to the weight, the packing list, the shipping details etc, but the former is a tax declaration so you need to understand custom taxes in the same way you would have to understand any other tax in order to make a return.”

Identify the potential pitfalls

A standard customs declaration form contains over 50 fields; some are straightforward but a lot require a high standard of customs knowledge, such as classification codes – beware, there are tens of thousands to choose from. “Possibly the most important part of the form is the customs classification tariff code,” says Carol. “That code will tell customs what the product is, what group the product falls into, what rate is applicable to your product, and if there is any licensing required. Customs classification is an art in itself – there are some products that are easy to classify, but most products these days are not straightforward as they could be a combination of technologies, or pharmaceutical and cosmetic, or a processed food. You must be able to work through the options and logically apply the one you think is correct. You should be able to explain your choice and understand the rules of classification. If you’re uncertain, you need to get a classification ruling from Revenue.

“Another tricky part is the value of your goods. It’s straightforward if it’s a simple sale of goods to a third party, but what if it’s inter-company or on consignment, how do you work out the value of the goods at that point? In that context, you need to understand the rules of origin.”

It’s also vital to talk to your customers about your international commercial terms, or Incoterms. Goods going in and out of the UK will need both import and export declarations and you need to work out who is responsible for making the declarations and paying the duties. “You need to talk to your customers about who is the importer and who is the exporter,” Carol explains. “With the EU, there were no customs and so goods were simply delivered to the customer, but if that is going to stay the case, then the goods need to be delivered duty paid – which means you have to export the goods and then import them into the UK so there’s a couple of steps. A compromise is that you act as the exporter and your customer acts as the importer, but that doesn’t always work out so you need to clarify this with your customer.”

Employ an agent

Companies can decide to fill through the forms themselves or they can employ an agent – but just like employing an external accountant, you are still responsible for the information on the form. “It’s important to understand customs, even if you’re not going to fill out the declarations yourself,” says Carol. “Look for an experienced agent – but be aware that there is a shortage of experienced agents both here and in the UK, so you need to start looking for one as soon as possible.”

Even more importantly, there is a lot of groundwork to do before employing an agent. “You need to have a master list of everything you buy from and sell to the UK. This is a schedule of all your products listed by SKU number with a description of the product, the tariff classification code and the applicable rate, along with any licences associated with that tariff code. If you only have a few products, it’s not a problem, but if you have 6,000 or more, it’s a big job.”

After that, working with a good agent is relatively plain sailing. “Once you have your agent and you’re beginning to lodge your forms, everything should be running smoothly and it’s really about auditing at this stage. Make sure you keep your master list up to date with any new products, and on an annual basis, review all your products to make sure the tariff classifications don’t change. Every month or week, depending on your volume, take a sample of the imports/exports and carry out your own internal audit.”

Take a training course

Carol would encourage everyone to undertake some sort of training in customs – and there’s plenty of courses to choose from. “Everyone should do some customs training. There are different levels; the Skillnet course is detailed training on how to fill out the form yourself, while Local Enterprise Offices are providing one day training courses on what customs is all about. Enterprise Ireland’s own customs insights course is available on Prepare for Brexit, while the Revenue and Enterprise Ireland customs webinar can be viewed onsite also. This is more than enough for most companies who will be employing an agent. And then Bord Bia is offering specific customs training for food and agri clients. I would urge anyone to avail of the training – it’s free and it’ll take the fear factor away.”

Customs: How to simplify your engagement with customs post-Brexit

The race is on to become Brexit ready, for when the UK exits its transition stage on 31st December. So from 1st January 2021, Irish businesses must be prepared to complete customs formalities related to the movement of goods to, from and through the UK. Preparation is a process that takes time, and with the deadline inching closer and closer, it’s essential that business start their journey to become customs ready as soon as possible.

 

Essential first steps

At the very least, businesses should register for an Economic Operators Registration Identification (EORI) number and work out who will make customs declarations. If you plan on making those declarations inhouse, then you must educate yourself on how to complete them and install specific customs software. If you are planning on using a customs agent, then you must find out what data they need from you in order to make accurate declarations.

After these two steps are completed, businesses should look into other customs-related issues, such as how customs duties will be paid, the impact of customs on your supply chain and logistics, changes to VAT and excise, and any licenses or certifications your goods may need.

 

Next steps

Once these are done, it’s time to look at any ways you can improve your customs journey – and the good news is that there are many ways to simplify your interactions with customs, depending on your business model. However, as many of these take time to set up, it’s worth educating yourself now on what’s available and what you need to do.

Applications for these authorisations or simplifications are made electronically through the Customs Decision System, and in each case, an application must be made simultaneously for a comprehensive guarantee.

“Once a business has registered with customs and worked out who is looking after declarations – and how this is going to be done – you can look at some of the various simplifications or authorisations with Revenue,” explains Raphael Ryan, Assistant Principal at Revenue. “One of these is the Deferred Payment scheme, which allows you to defer payment of duties until the following month. This can really benefit your cashflow, but as it requires a guarantee with a cash deposit or from a third-party financial institution, you need time to set these up.”

Authorised consignee and consignor allow you customs clear your goods from your premises, so you have all your declarations completed before you even get to the port, making movement through the ports quicker and more streamlined,” explains Raphael.

“In addition, warehousing is another key simplification. This is for businesses that bring import goods in bulk but may not need to use them for several months, they can use customs warehousing and not pay duty until they are released for use.” Temporary storage is a related simplification, in which goods are kept under customs supervision until they are placed under a customs procedure, re-exported or destroyed.

“In terms of outward processing and inward processing, these are mainly linked with manufacturing companies that are bringing in goods from the UK for further processing,” Raphael continues. “This allows you to reduce some duties, and it’s linked with comprehensive guarantees.” More information on inward processing can be found in our recent webinar.

Other simplifications are available for bigger businesses with a lot of goods in transit. “Simplified Declarations and EIDR [Entry in the Declarants Records] are mainly for larger companies that would have the capability for monitoring and managing the flow of goods through their premises, and keeping detailed records of these. It’s something that larger operators should consider as it does give them extra benefits too, such as keeping the flow of goods as close as possible to just in time.”

Information on these simplifications and authorisations is available on Revenue.ie, along with contact details for more guidance on setting up the relevant systems. “There is a lot of information on Revenue.ie and we’re updating it constantly with step-by-step explainers and more aids,” ends Raphael.

Customs Deferred Payment Scheme: Giving your cashflow a much-needed break

As the Brexit transition deadline of 31st December 2020 looms closer and closer, businesses that trade with the UK are preparing to deal with customs in 2021. The first step is to register for customs through Revenue Online Services (ROS) and apply for an Economic Operators Registration and Identification (EORI) number; once this is done, you must decide who is going to fill out customs declaration forms and that they have the data and knowledge needed to complete the job.

The next vital step is to decide how you are going to pay the customs charges. Joe Cleary, Operations & Accounting Unit at Revenue, explains the process: “When goods move through customs, you must make a declaration and make any payments due before the goods can be released to you. The customs can be paid through an account with Revenue, which is kept in credit and from which Revenue takes money when it is due.”

This account is automatically set up when you register for customs; the snag is that you must have the money in the account before the charges need to be paid, as your goods will not be released until Revenue has received payment. This can be difficult for companies dealing with tight cashflow issues.

 

Deferred Payment Scheme

“Alternatively, you can run up a bill over the course of a month and pay that bill by the 15th day of the following month,” explains Joe. “This is the deferred payment arrangement, and in order to get this, we require a Comprehensive Guarantee, which usually takes the form of a bank guarantee.”

 

Step One: Apply for a Comprehensive Guarantee with Revenue

Mary Long, Comprehensive Guarantee Unit at Revenue, explains more: “You need to apply for the Comprehensive Guarantee first through the Customs Decisions System (CDS); we run various checks and then give a Letter of Guarantor’s Undertaking to you for your bank. We advise traders to tell their banks that they are applying for the guarantee when they are starting the process, so they can get whatever papers are needed by the bank before they even get the undertaking, as this will minimise any delays.”

The application form for the Comprehensive Guarantee is fairly straightforward, but one important consideration is the amount you need the guarantee to cover, and this will vary according to the volume and type of goods going through customs. “The guarantee should cover two months of goods,” says Mary. “The limit that can be deferred each month is €100,000 so for companies importing a lot of goods, they would need a guarantee of €200,000. If they exceed €100,000 in a month, they must top up by cash at the end of the month. We send out regular statements and it’s a very easy process to top up if business improves and a company suddenly needs to import more than their guarantee covers.

“My advice is to consider carefully the amount you need as a guarantee before applying. You can of course top up with cash or go back to the bank but it could take time to re-apply to the bank for more.”

 

Step Two: Apply for a credit guarantee from your bank

Once Revenue has carried out a number of compliance checks and approves your application, a Guarantors Undertaking is issued, which can be taken to the bank. Roisin O’Shea, Head of Food & Drink Sector at Bank of Ireland Business Section, explains more: “Our part of the process only really starts when Revenue has approved a business for a Guarantors Undertaking, which outlines the amount of a guarantee needed. We would then ask the client to bring that letter into their bank or to their relationship manager. Essentially it’s a credit application, so would go through a similar process as a loan application. The length of time it would take to approve varies according to the complexity of the business, but [on average] it would take approximately two weeks. The greater the amount, the more complex your business, the longer it could take.”

As this is a credit agreement, some of the information requested by the bank would be similar, such as financial details, accounts and cash flow projections. The bank will also require security; the minimum security required is a Counter Indemnity, which obliges you to reimburse the bank if Revenue calls upon the bank to honour the guarantee – however, you could be asked for additional security. At this stage you will also be advised of the fees.

Once approved, the bank will sign the Guarantors Undertaking and send it back to you, or straight to Revenue, if you specify. “Once you’ve been approved for your Comprehensive Guarantee, you can apply for  a customs deferred payment authorisation,” finishes Joe. “This can be applied for through the CDS, and this is very quick, usually just a day or two.”

It’s worth remembering that the Comprehensive Guarantee is needed for many of the authorisations and simplifications that could make your interactions easier with customs, including the UK Land Bridge, which allows goods to travel through the UK to another EU country. “Ask yourself if you need a Comprehensive Guarantee and if you don’t, can you explain clearly why not?” says Roisin. “Certainly the message we’re getting from Revenue is that you need a guarantee for a lot more situations than a lot of people might think.”